EU fiscal policy reflects broader tensions

EU fiscal policy reflects broader tensions

The Eurogroup President’s proposal for an independent fiscal committee will not water down tensions between member states over fiscal policy. 

Over the past 6 years, Europe has been dealing with successive crises that have driven away investors. But despite the urgency of resolving last summer’s Greek drama, the current refugee crisis or the upcoming Brexit threat, deeper issues still need to be sorted out.

The lack of initiatives to tackle structural issues reveals yet another strong signal that European partners are not committed to deeper integration, but will continue to focus instead on internal, domestic political pressure while reserving their political capital for urgent EU-wide crises.

Among the first victims of this situation is fiscal policy, which remains on the radar of the European Commission but struggles to gain traction

When Eurozone Finance Ministers met on November 9th in Brussels, they were set to discuss a release of bail-out money in exchange for the latest reform package from Athens along with EU fiscal policy and the banking union. But with insufficient measures passed by the Hellenic Parliament so far — and more particularly its failure to tackle nonperforming loans — the Greek debate dominated the Eurogroup discussion, thereby postponing the council’s focus on fiscal policy.

The proposed fiscal oversight body reflects concerns

This can be seen as quite surprising, as budget rules have been at the center of attention in the past few weeks.

Last week Eurogroup President Jeroen Dijssbloem, called for the creation of an independent council to evaluate member state’s fiscal programs. This committee would not have any influence on the Commission’s decision to sanction Member States for fiscal imbalance. Its role would be limited to “advising, criticizing and alarming” member states and the Commission over national budgetary plans.

Overall, European countries have lowered their budget deficits since 2011 amid the tightening of Brussels’ fiscal rules.


Source: European economic forecast – Autumn 2015

But Dijssbloem’s announcement reflects the frustrations among some Member States over the Commission’s decision not to sanction powerful countries for breaching EU rules. Last March, to the astonishment of fiscal hawks in Germany, France — who has not registered a budget surplus since the 1970s — was given two extra years to meet the Commission’s target of a deficit below 3% of GDP, after Paris repeatedly disregarded the target.


Source: European economic forecast – Autumn 2015

Brussels is also felt to have turned a blind eye to Italy’s budget. The third largest economy in the euro area has repeatedly failed to observe EU fiscal rules. However, Prime Minister Matteo Renzi has the backing of the European Commission for a reformist agenda, including a labor reform that was endorsed by Brussels. Rome is now expected to generate a 2.6% deficit this year, and thus meet the 3% target. Even Renzi’s recent introduction of a budget plan including tax cuts worth €35bn over three years did not trigger a warning from Brussels.


Source: European economic forecast – Autumn 2015

In preparation for its decision to avoid sanctioning more powerful members, the Commission had published a communication titled “Making the best use of the flexibility within the existing rules of the Stability and Growth Pact” in January in which the EU Executive laid out that the implementation of structural reforms would be taken into account when reviewing national accounts.

Electoral budgets vs. austerity

Structural reforms promised by Paris and Rome surely played a major role in the Commission’s sympathy for those governments. But the prospect of upcoming elections and high scores of anti-EU and anti-austerity parties must have had an impact too.

The French will vote in regional elections in December – a vote that is seen as a preview for the 2017 presidential elections – and the Eurosceptic party National Front is expected to perform better than ever. Facing the nationalist threat, Socialist President François Hollande has reversed his fiscal policy in the latest budget.

The move has annoyed Brussels who warned that France could miss the 3% target in 2017 — and be the only country to do so. But European officials fear that sanctioning France over its budget would give National Front leader Marine Le Pen a boost in her already promising claim to become the country’s next president.

On 16 November, President Hollande even announced that — following Friday’s terrorist attacks in Paris — he would increase security spending to the expanse of the country’s commitment to balance its budget. It is doubtful that Brussels will try to oppose such a measure, considering the widespread emotion that followed the tragedy.

Italy will not hold any major election in the near future. But Matteo Renzi is considered by European officials as the only potential political partner in Italy. Berlusconi’s Forza Italia is still in shambles and Renzi’s main competitor now lies in the anti-establishment 5 Star Movement.

In Spain, the Center Right Prime Minister Marian Rajoy has also changed fiscal policy stances and introduced what was perceived as an electoral budget, ahead of a general election in December. The conservative leader feels the pressure from two new electoral forces, leftist (and close to the Greek anti-austerity Syriza party) Podemos and center-right Ciudadanos.

The Commission recently warned that Spain was unlikely to meet its objective to bring its deficit below 3 per cent of GDP next year. While this may provide some backlash, only EU sanctions would really influence the outcome of the election at this stage.

Another divider

With new budgetary free-riders potentially joining the French and Italians, fiscal policy has the potential to divide European partners further as they approach discussions on the future of the Eurozone. When Germany and France — both in support of a stronger Eurozone — lead the discussions in December, one should expect their diverging views on fiscal policy to resurface.

Germany will most likely continue push for stronger enforcement of existing rules governing fiscal responsibility, whereas France will propose plans to create a common budget for single the currency area. With such opposite visions, the current system for checking national accounts will probably remain unchanged.

Meanwhile, setting up an independent committee will not solve budgetary issues in noncompliant states. The EU already has a multitude of advisory councils and it is very likely that this kind of committee will have no impact on member states’ fiscal plans or the Commission’s decision to sanction them.

In the coming months, the European Commission could even soften its watch on national budgets. Dijsselbloem’s suggestion that the European Commission give budgetary leeway to countries bearing the costs of humanitarian action could become a negotiation tool in order to create a consensus on the refugee crisis.

Hollande’s announcement that he would prioritize his Security Pact over the Stability Pact will also force Brussels to show ever more mercy to member states.

Once again, Europeans will prioritize the resolution of a current crisis at the expense of structural policy, and in the meantime hope they can rely on more quantitative easing and a set of external factors – including cheap oil – to keep their economies afloat.

Categories: Economics, Europe

About Author

Julien Freund

Julien is an analyst with a focus on Europe. He has worked as a lobbyist in Paris and Brussels and has written extensively on the rise of nationalist parties. He holds two master's degrees in geopolitics and international relations and in European relations, and received his BA in economics and social sciences from the Catholic Institute of Paris.